Lesson 9 of 14 · 2 min
How futures work
Contracts, margin, leverage, daily settlement and expiration — in plain English.
A futures contract is an agreement to buy or sell something at a set price on a future date. Traders almost never hold to that date — they buy and sell the contract itself as its price moves.
The key ideas
- Standardised — every ES contract is identical, set by the exchange. That's why it trades in one central place.
- Long or short equally easily — you can sell first and buy back later. No borrowing shares.
- Margin — you post a deposit, not the contract's full value. That's where the leverage comes from.
- Daily settlement — profits and losses are settled into your account every day.
- Expiration — contracts expire (quarterly for ES and NQ); traders roll to the next one.
How leverage works
One ES contract controls $50 × the index level — hundreds of thousands of dollars of exposure — for a much smaller margin deposit. A 1% move in the index can be a large share of that deposit.
The catch
Leverage magnifies losses exactly as much as gains, and futures losses can exceed what you deposited. Size from your stop and risk rule — never from how much margin your broker allows.
Who regulates it
In the US, futures trade on regulated exchanges and are overseen by the CFTC. Futures brokers must be registered, and you can check them through the NFA (see Choosing a broker).
Quick recap
- A futures contract is a standardised agreement traded on an exchange.
- Margin creates leverage; losses can exceed your deposit.
- Contracts expire and get rolled.
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